'Fed's pause is good news for Canadian economy'

'Fed's pause is good news for Canadian economy'

The US Federal Reserve is expected to reiterate its interest rate stance tomorrow – and that’s excellent news for Canada, according to the AGF Investment CEO.

Investors both sides of the border welcomed the pausing of both countries’ rate hiking policy at the turn of the year with a spectacular rebound from the December sell-off. Fears eased that we were being led into recession and the economies were given welcome breathing space.

For Canada, it meant the pressure on the economy from household debt and the housing bubble has eased – as has the need to follow in the Fed’s footsteps.

Kevin McCreadie said: “I think there are issues [in the Canadian economy]. There is a little bit of relief that the Bank of Canada does not have to raise rates now the Fed has stopped.

“The fear would be if they have to keep raising, we would have to keep step with the US and you could have [added to] what could be an emerging debt bubble and housing bubble. Now they have been able to raise rates slowly and take a pause to see if that’s starting to cool off, and see if that overts some sort of larger issue.

“If the Fed had kept raising then the Bank of Canada would have – for a number of reasons – had to keep some pressure on as well. Well, that has been removed. If you look at some pretty well-known data, Canadians’ debt to disposal income is pretty high. The fact they have been able to put the brake on for now will be good for the Canadian economy and Canadian citizens.”

McCreadie expects equities to “grind higher” this year, something that will be aided and abetted by a pause in interest rate increases. However, with volatility now back in the game and the general consensus that we are late in the cycle, he recommended that investors take some money off the table.

He explained: “For now, we have had a very good bounce in equities. We would probably take some money off the table, not a lot.

“If your normal rate is 60% equities, take 3% out. Similarly, if you are worried that maybe growth will reflate and short rates start to drop, we’ll probably take some out because look at where 10-year yields are? They’ve dropped pretty dramatically.

“It feels like unless you’re really going into a recession or the economy is starting to soften, the rates are too low for a world where growth is 2-3% and the IMF is around 3.2%. I would say take a couple of per cent out of your normal bond rate and sit a little in cash. Be 3% lighter in equities, 3% in fixed income, maybe 5-6% in cash to barbell yourself because cash is earning you something on the short end … that way you can play this grind higher in a safer way.”